The outlook for credit union lending in 2021
Golda Meir said, “You’ll never find a better sparring partner than adversity.” Applying that wisdom, credit unions should be in prime shape to put a tumultuous year behind them and charge forward with lending in 2021.
In forecasting opportunities and challenges for the coming year, lending leaders are contending with great uncertainty and the disparate impact of the COVID-19 pandemic across regional economies and specialized fields of membership.
“A lot of credit unions are having trouble making money in this environment,” cautions Allen DeLeon, CPA, founding partner of DeLeon and Stang, Gaithersburg, Maryland. The returns on investments in the current rate market are uniformly low, fee income has been down as members shied away from using credit cards and ATMs, and the glut of deposits is pushing down capital ratios.
That leaves lending as the most likely source of revenue, DeLeon says. “Fortunately, first mortgages are booming, and people are taking advantage of low rates. Credit unions are doing a good job making mortgages and home equity loans.”
Auto loans have also begun to rebound, especially in urban areas where people are avoiding mass transit, he notes. Though captive finance companies command the new auto loan market, CUs are positioned to do well with used auto loans.
What about delinquency and charge-off trends? “I think the simple answer is up,” says Mark Rodriguez, chief lending officer of Partners Federal Credit Union. “Right now, delinquency is masked” by forbearance granted for up to 180 days, which was starting to end this fall.
Different Starting Lines
The view from two CUs with tourism-reliant memberships offers an example of the pandemic’s uneven impact and the challenges in charting a path forward. At $626 million/91,000-member 4Front Credit Union, Traverse City, Michigan, the initial lending forecast was for beginning 2021 with a surge of pent-up demand that would quickly decline to a more routine pace. But as of early fall, “we have not seen standard volumes yet. We are still running higher than we had forecast for 2020” for loans across the board, says SVP/Lending Heather Carey, a CUES member. Thus, the CU’s revised forecast is “a return to normal buying habits.”
The CU’s field of membership spans the upper half of Michigan’s lower peninsula, where tourism reopened in May and businesses got a busy summer season as Midwesterners traveled closer to home.
“I think with people not being able to fly, we got even more tourism business, and the season was longer because people were coming from just a few hours away,” Carey says. “We had restaurants and outdoor facilities open when nobody else did, so it really helped us rebound.”
In contrast, the lending team and business intelligence specialists at $2 billion/181,000-member Partners FCU, Burbank, California, face great uncertainty about when people will travel to parks and resorts. The CU serves the employees and cast members of The Walt Disney Company.
As of mid-October, Walt Disney World in Orlando was open at about 25% capacity, Disneyland in Anaheim was closed, and tens of thousands of members were on furlough with no income. Disney announced 28,000 layoffs at parks and resorts and furlough extensions for such shuttered business units as its cruise line.
EVP/Chief Operating Officer Chris Parker, who’s been with Partners FCU for 14 years, says 2020 “is probably the most difficult year from a budgeting perspective we’ve ever had, and we expect the effects of the pandemic to continue to be with us throughout the majority of 2021.”
Boom in Residential Mortgages
A bright spot is mortgages, in anticipation that the Fed will keep rates low for much of 2021, Rodriguez says. Partners FCU sees “a significant opportunity for the first mortgage product, both in refinances and purchase transactions. Even with a record year of refinancing in 2020, we still have about 20% of our servicing portfolio that is at above market rates that could refinance. And that’s not to mention the dollars that members are bringing to us from external institutions ... as they refinance their mortgages with Partners.”
On the other hand, many members are paying down their home equity loans or rolling them into their first mortgage refinancing, he notes. Even those members who are planning big home improvement projects are timing their refinance to cover those costs.
There was a sharp divide between the trajectory of commercial and residential real estate in 2020, says Steve Hewins, SVP of CUESolutions Bronze provider CU Members Mortgage, Dallas, and that divergence is likely to persist in the coming year. The long-term demand for office space looks bleak as remote work takes hold. Retail store traffic was declining even before the pandemic, and a slow comeback for hotels and restaurants is forecast.
In contrast, “even with high unemployment and the GDP slowed to nothing, there was still a high demand for home mortgages with interest rates at an all-time low,” Hewins says.
U.S. mortgage originations were expected to top $2.9 trillion this year, the most volume since 2005, driven largely by refinancing, Hewins says. A 2021 forecast in the $2.1 trillion range reflects the refi wave waning and an anticipated slight increase in home sales, which may be somewhat stymied by scarce inventory in some regions.
“At first with COVID, we thought, ‘Well, that’s going to be the end of purchases,’” he notes. “But Realtors got creative with virtual showings, and some buyers moved out so their houses could be shown without sharing the space with potential buyers.”
The Canadian Real Estate Association, Ottawa, Ontario, also reported record home sales in July and August, but Moody’s Analytics has forecast a 7% drop in housing prices in major markets in 2021. The analytics firm cited persistent unemployment, an oversupply of single-family homes in such cities as Calgary and Edmonton, and affordability challenges in Vancouver and Toronto.
Auto Lending Opportunities
In polling of economic analysts, CUES Supplier member and CU Direct subsidiary Origence, Irvine, California, has seen a consensus that new car sales in the United States will drop to around 13.8 million this year, a 20% decrease from recent annual total sales in the 17.2 million to 17.5 million range, says COO Bob Child.
In Canada, auto sales posted a 2.4% gain in September, halting a six-month decline, according to S&P Global.
For 2021, economists’ forecasts gathered by Origence are in the 15 million range, an 8.7% increase over this year. This is consistent with the company’s surveys of the large CUs using its indirect lending platform: About a third were forecasting auto loan volume in a range from no increase to 5% growth, while 42% were predicting 5% to 10% growth in their auto lending next year.
With captive auto lenders continuing to offer 0% interest and other incentives, CUs’ greatest opportunity will be in the used car segment, Child suggests. Volume through Origence this fall was 75% in used vehicle financing. As of early fall, CU auto lending was down 14% for the year, but used car loans were only down 4%.
4Front CU did a steady business in auto, RV and camper loans over the past year, and Carey expects that pace to continue into 2021. The CU aims to provide more transparency and consistency around the loan decision process by providing members with their credit scores through its online banking portal, powered by SavvyMoney, and by pricing auto loans based on credit scores rather than on the model years of vehicles.
“That car doesn’t pay you back. The person does. So, we base pricing on the ability to pay the loan,” Carey says.
Older model cars are popular among 4Front CU members, as is their credit union’s “liberal approval process” that recognizes some members have been through tough times recently.
“If members have proven to us that they have the ability and intent to pay, we want to do everything we can to get them into a car whether they fit into a perfect box or not,” Carey says. “If you had a hiccup because you lost your job during COVID, well, that happens. We know our market, and we know how our members have struggled. If you want to buy an older car, more power to you.”
4Front CU has customized a credit scoring model for approving loans that discounts smaller collection issues and late payments related to an isolated setback. National credit scoring models are just starting to recognize the impact of one-time incidents, “but that’s something we’ve always focused on as an institution: It’s called life, and it happens,” she says.
Service Lessons From the Pandemic
There is great potential for a big lending lift for CUs with the will and resources to address service gaps that became more obvious as members shifted to remote channels, suggests CUES member Bernard G. McLaughlin, president/CEO of $840 million/60,000-member Point Breeze Credit Union, Hunt Valley, Maryland.
“Right now, we’re treading water because the pandemic has knocked the economy off,” McLaughlin says. “And it’s not just about members who’ve lost their jobs, but people who have jobs but aren’t confident about spending yet. Once COVID goes away, demand should rebuild quickly.”
The pressure on Point Breeze CU’s contact center staff working from home has been enormous, with volume almost tripling as the pandemic took hold, he notes. Remote call center employees must be thoroughly trained to field diverse inquiries, from balancing checkbooks to fraud reports to suffering job loss to mortgage application.
Diverting calls to convenient self-service outlets is another means to alleviate this overload and improve service. Point Breeze CU is investing in improving its remote mortgage lending channel, with a goal to launch a fully automated application process in the spring of 2021. “It used to be that 80% of our mortgage applications were in person, and now it’s flipped to 80% online,” McLaughlin says.
Partners FCU has seen a similar shift, Parker says: In 2015, more than 60% of borrowers applied in person at a branch, while 12% signed into internet banking; this year, 39% of applications came from online and mobile channels, 31% by phone, and 30% in a branch. To keep pace with members’ evolving preferences, the CU is rolling out improvements in the member lending experience in both its automated underwriting and digital applications.
Partners FCU partnered with CUESolutions Silver provider Experian, Costa Mesa, California, to incorporate trended credit data and additional credit bureau information into the decision engine that powers its new customer acquisition model. The model combines findings based on loan performance from 100,000 Partners FCU applications to identify the borrower characteristics and trended data, which presents a view of credit standing over time rather than a single snapshot, Rodriguez explains. These credit criteria should more closely reflect the credit union’s “unique membership,” with its concentration of hourly workers in central Florida and Southern California, 60% of whom are classified as lower income.
“We’ve done the math on it and modeled it based on our membership and applications that we’ve received, and it looks like we could stand to deepen the number of approvals using this new model by about 4%,” he says.
Partners FCU will also roll out new versions of its digital lending platform for online and mobile access, first for consumer loans and then for mortgage and home equity applications, to reduce the number of fields members need to complete and to incorporate more automated verification through third parties.
Working with its loan platform provider Temenos, the CU aimed to streamline the time to complete a consumer loan application from 25 minutes to 10 with its first rollout this fall—and then down to five minutes with the next iteration, Parker says.
4Front CU is launching an automated small business platform that will upgrade service to be more on par with its online consumer experience. That investment is intended to address one of the member service pain points identified in the early months of the pandemic: “It came down to staffing. Those people who are experts in business lending are fewer and further between, so we needed to build a platform to help walk employees who are maybe not as experienced in business lending through the process,” Carey says.
Those improvements reflect the CU’s commitment to convenient access, she adds. “There are times when our rates are higher in certain areas and we can still win the business because of our service. Our board and executive team support ease of use and winnowing down policies that might hold up the loan process.”
Assessing Financial Performance
Even as mortgage loan officers look forward to another busy year for new applications, servicing departments are gearing up to work with borrowers at the end of their forbearance periods. As of early fall, 3.6 million American homeowners, about 7% of all residential mortgages, had sought and been granted a three- to six-month moratorium on mortgage payments, Hewins says.
Auto loan delinquencies were actually down slightly for 2020, Child notes, but that statistic reveals only part of the picture. As of Aug. 18, according to Experian research, 5.4% of auto loans were under forbearance (CUs’ forbearance rate was slightly lower than the industry average), with the OK to delay two to four monthly payments to the end of the loan term. That raises the concern that delinquencies could spike in early 2021 if those forbearance periods end before borrowers return to full employment.
Requests for forbearance from Partners FCU members began coming in April and continued into the summer. The CU started with a 90-day period. “We would do an additional 90 days, but at that point we requested some sort of documentation to show that they were still impacted by a furlough or unemployment,” Rodriguez says. About 20% needed that extra period of forbearance.
“We’re just trying to remain flexible,” he adds. Partners FCU’s mortgage subservicer, Cenlar, “has sufficiently staffed up to cover mortgage collections and modification volume, and internally we leverage (CUES Supplier member) SWBC (San Antonio, Texas) to handle a portion of our consumer collections as well as scalable capacity for unanticipated volume.”
Point Breeze CU serves many federal government employees. It has been somewhat insulated from the direct impact of the pandemic economy, but significantly increased its loan loss reserves in anticipation of a wave of delinquencies. Requests for forbearance were spread over several months and, as of September, “it hasn’t slowed down,” McLaughlin notes. “Every month we see another group of people coming in, so we’re keeping our fingers crossed that we will come out of this in good shape.
“It’s an amazing time, with both winners and losers in the current economy,” he adds. “We continue to remain focused on our members and the challenges they have.” cues icon
Karen Bankston is a long-time contributor to Credit Union Management and writes about lending, operations, technology and membership growth. She is the proprietor of Precision Prose, Eugene, Oregon.